Regulatory Competition

REGULATORY COMPETITION

AND INTERNATIONAL HARMONISATION

Konstantine Gatsios* and Peter Holmes**

* Athens University of Economics and Business, 76 Patission St, Athens 104-34, Greece; and CEPR.

** School of European Studies, University of Sussex, Brighton, BN1 9QN, UK.

Tel : (01273) 678832, email p.holmes@sussex.ac.uk

Abstract

In recent years more attention has been paid to the extent to which various form of domestic regulatory policies could, deliberately or inadvertently, constitute barriers to trade.

Producer interests often demand trade measures to force harmonisation on trading partners. Economists on the other hand argue that differences in national rules and regulations are just one factor which determine comparative advantage and many writers have argued that "regulatory competition" is positively beneficial as a way of selecting the best norms, and cite the writings of Tiebout in support of this claim.

Regulatory competition can be defined as the process where regulators deliberately set out to provide a more favourable regulatory environment, in order either to promote the competitiveness of domestic industries or to attract more business activity from abroad. The setting of national regulations in response to the actual or expected impact on internationally mobile goods, services or factors on national economic activity may lead to a form of arbitrage by economic actors across the various market opportunities.

Critics claim that it can lead to a "race to the bottom" in national standards. Here we argue that the "Tiebout Theorem" is in fact wholly inapplicable to regulatory competition and we conclude that regulatory competition is neither as beneficial as its advocates say nor as harmful as critics maintain.

Acknowledgements

The authors are grateful for advice to the editors of the 'New Palgrave Dictionary of Law and Economics' where this essay is scheduled to appear. Peter Holmes is grateful to the ESRC's Global Institutions Programme for financial support for work on the International Regulation of Competition and Competition Policy.

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